Question

Halifax Manufacturing allows its customers to return merchandise for any reason up to 90 days after delivery and receive a credit to their accounts. All of Halifax's sales are for credit (no cash is collected at the time of sale). The company began 2021 with a refund liability of $300,000. During 2021, Halifax sold merchandise on account for $11,500,000. Halifax's merchandise costs is 65% of merchandise selling price. Also during the year, customers returned $450,000 in sales for credit, with $250,000 of those being returns of merchandise sold prior to 2021, and the rest being merchandise sold during 2021. Sales returns, estimated to be 4% of sales, are recorded as an adjusting entry at the end of the year. Required: 1. Prepare entries to (a) record actual returns in 2021 of merchandise that was sold prior to 2021; (b) record actual returns in 2021 of merchandise that was sold during 2021; and (c) adjust the refund liability to its appropriate balance at year end. 2. What is the amount of the year-end refund liability after the adjusting entry is recorded? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Prepare entries to (a) record actual returns in 2021 of merchandise that was sold prior to 2021; (b) record actual returns in 2021 of merchandise that was sold during 2021; and (c) adjust the refund liability to its appropriate balance at year end. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) View transaction list 1 Record the actual sales return of merchandise sold prior to 2021. Record the cost of merchandise returned for goods sold prior to 2021.

Answer 1

Part A

No.	Year	General journal	Debit	Credit
1	2021	Refund liability	250000
		Accounts receivable		250000
2	2021	Inventory	162500
		Inventory – estimate returns		162500
3	2021	Sales returns	200000
		Accounts receivable		200000
4	2021	Inventory	130000
		Cost of goods sold		130000
5	2021	Sales returns	210000
		Refund liability		210000
6	2021	Inventory-estimated returns	136500
		Cost of goods sold (210000*65%)		136500

Estimated returns of 2021 sales (4% * $11,500,000)	460000
Less: Actual returns of 2021 sales	(200000)
Remaining estimated returns of 2021 sales	260000

Cost of goods sold ($200,000 * 65%) = $130,000

Inventory – estimated returns ($250,000 * 65%) = $162,500

Sales returns ($450,000 - $250,000) = $200,000

Beginning balance in refund liability	300000
Less: Actual returns of pre-2021 sales	(250000)
adjustment needed	210000
Ending balance in refund liability	$260000

Part B

Ending balance in refund liability

$260000